TV everywhere’ might not cut your $150-a-month cable bill

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Jan 25, 2014 at 3:54 AM

Charter’s bid to buy Time Warner Cable comes at a time of sharp and rising competition in the broadband Internet and pay-TV business. For the consumer, that promises faster and faster Internet speeds and more and more high-definition channels.

Charter’s bid to buy Time Warner Cable comes at a time of sharp and rising competition in the broadband Internet and pay-TV business. For the consumer, that promises faster and faster Internet speeds and more and more high-definition channels.

It means further advances toward "TV everywhere," with consumers watching pay channels on their smartphones and tablets far from home.

But it doesn’t mean lower prices, analysts say.

Competition has cable, phone and satellite companies scrambling to sign up customers with cheap initial prices that last a year or so. Companies hook customers, then hope they hang around when the prices jump.

Jump they do. A typical Charter introductory package of phone, Internet and TV starts at $110 a month, climbs to $130 after a year and $150 after two years, according to a Charter Communications Inc. presentation to analysts.

But the battle hasn’t had much effect on the full retail prices that long-term customers pay, analysts say. Instead, there’s been an upward creep in bills around the country, analysts say.

"Prices have been rising 5 or 6 percent a year, and consumers now pay about double what they did 10 years ago," said Jeff Kagan, an independent telecommunications analyst in Atlanta.

Meanwhile, this month’s court decision striking down "net neutrality" raises the possibility of higher prices for over-the-Internet competitors such as Netflix and Hulu.

Such services let customers bypass the cable to watch shows on demand, and they have prompted some to cut the cord and cancel cable TV.

"The cable TV industry is in transition. It’s under threat from new competitors," Kagan said. "There is new technology, exciting new companies and new ways to watch TV."

In the St. Louis area, for example, Charter and AT&T are in a technological arms race. Charter this month announced plans to move all its customers to digital service. That means a cable box or TiVo-like device on all but the most advanced TVs.

The switch eliminates analog service, which for most customers meant plugging the cable directly into the back of the TV. A single analog channel takes as much capacity as 14 digital stations. So digital means that Charter can move much more through its cable "pipe."

Charter says it will use that space to double the speed of its standard residential service to 60 megabits per second, or mbps, from 30 later this year at the same price. It also plans to add 79 HD TV channels, catching up to AT&T’s offerings on its U-verse service.

AT&T’s broadband service is a "small step under" Charter’s service today, said Ian Olgeirson, analyst at SNL Kagan. The race is on to close the gap.

AT&T says it plans to double its U-verse Internet speeds by the end of next year. The company offers up to 45 mbps in many areas, the company says, although in many others the limits are a fraction of that speed in others. The company plans to move to 100 mbps eventually.

That is a lot of speed. By comparison, an HD-quality Netflix movie requires about 5 mbps.

Part of the motivation is on display in Kansas City, where Google is experimenting with fiber-based Internet service at 1,000 mbps. "It’s set a new bar," said Alan Breznick, video-cable practice leader at Light Reading, a telecom news and research service.

Few think Google will move nationwide with such service, but it has competitors worried, Breznick said. They see where speed is headed.

"Customers finally have choice, but not all customers and not in all markets," Kagan said. "Where we have choice, the traditional cable TV companies have had to quickly get better."

Nationally, phone companies have about 10 percent of the market for pay TV, compared to 55 percent for cable. That’s because the phone company geographical footprint is still much smaller than the cable companies for fast Internet and TV.

Meanwhile, DirectTV and the Dish Network are selling satellite TV to people who don’t like the cable and phone companies.

An arms race isn’t cheap. Charter says it has spent more than $2 billion on system upgrades. AT&T calls its U-verse expansion a "multibillion-dollar three-year project."

Those big investments are one reason that competition is playing out in service improvements more than a price war, Olgeirson said.

It’s unclear what effect the hostile takeover of Time Warner Cable might have on customers — if the takeover happens.

Charter is a company with relatively heavy debt and great need for capital spending. The merger — which would be financed with both debt and stock — would leave Charter a much larger company with relatively heavy debt and a great need for capital spending.

Charter is a shark pursuing a whale. Time Warner is nearly three times Charter’s size. The smaller company claims it can make the whale swim more efficiently. It pledges to improve management, systems and sell better products.

Charter also says its larger size would give it the clout to demand discounts from the owners of cable stations and other content providers. Those costs now eat up about 40 percent of Charter revenue.

Charter executives declined to be interviewed for this report.

Because of its size, Time Warner already swings much weight with the providers, Breznick said. Any benefits from squeezing harder are likely to go to the company’s bottom line, not in price cuts to customers, he noted.

Charter expects more than $750 million in cost reductions from the merger. Part of that comes from programming savings, while the rest comes from "rationalizing" operations.

As the phone companies grow their footprint, cable companies are seeing a slow drain of pay-TV customers. Many move to phone company services as they become available.

"It’s pretty constant. You see AT&T and Fios (Verizon’s competitor to cable) taking share on quarter after quarter," said analyst Olgeirson.

On pay TV, it’s coming closer to a zero-sum game. "Video is essentially a mature market. There’s not a tremendous amount of growth left in that space," Olgeirson said.

That can be troublesome for companies such as Charter, which gets 49 percent of its revenue from pay TV subscriptions, compared to 27 percent from Internet service and 8 percent from providing telephones.

Charter lost 3 percent of its video customers in the year ending last September, but its Internet customers rose 7 percent and phone customers rose 9 percent.

Companies are trying to hold on to video revenue by raising prices and up-selling the remaining customers into more expensive sports packages or to rented digital video recorders. They are aggressively pushing package deals combining video with phone and Internet.

At Charter, that seems to be working. The company saw its revenue rise 5 percent when adjusted for acquisitions during the 12 months ended Sept. 30.

In the competitive battle, the latest push is to help customers carry pay TV around in their pockets and pocketbooks. The buzzword is "screen-agnostic," said Nancy Garvey, vice president at AT&T.

That means easy access to pay TV on smartphones, tablets and laptops.

"We’re in the middle of a long process of rewriting the way we consume TV," Kagan said. "It will be on the smartphone, on your smart watch."

The coming of cheap, over-the-Internet alternatives is also changing the market. A $7.99 monthly subscription to Netflix or Hulu can beat a $50 cable TV bill for consumers willing to skip some cable shows and wait for others.

But a federal appeals court in Washington earlier this month cast some doubt on the future of such services. It tossed out a Federal Communications Commission rule requiring that broadband providers treat all Internet traffic equally, a concept called net neutrality.

That raises the possibility broadband providers such as Charter and AT&T could slow some traffic and speed others, depending on what the traffic-provider will pay. In effect, they could place a toll on companies such as Netflix, altering the competitive economics.

The costly technology race also raises the question of how much service people actually want. As capacity grows, "there will be more and more HD, then ultra-HD," Breznick said.

But do people really want 200 HD channels, or a picture so clear it would show the pores on the skin? Will they pay for it?

People asked that same question when pipe capacity was much smaller, Breznick said. But people always find a way to fill it up, if not with TV channels, then with something else.

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